Deck 24: Sole Proprietorships and Partnerships

Question 1

You do not trust your partners and are concerned about liabilities you may incur if you continue to associate with them in business.To ensure that you are safe from any future liability toward third parties that did business with the partnership while you were a partner,you should

A)retire and place a legal notice in the official provincial government publication.
B)sell your partnership interest to someone else.
C)get your partners to sign an acknowledgement that you will not be responsible towards third parties that have a claim against the partnership
D)retire and send a notice to all third parties who did business with the partnership.
E)none of the above

Answer 1

D

Question 2

Use the fact situation in Q6 to answer the related question that follows. The liability that arises in this case is based on the principle that

A)each partner is an agent of the partnership.
B)a partnership is bound by the acts or omissions of its partners.
C)it is the duty of the partnership to notify customers of the resignation of a partner.
D)partners are jointly liable for the contracts of the partnership.
E)all of the above

Answer 2

E

Question 3

Albert and Edward have just become lawyers and wish to set up a practice together.In order to best protect themselves,they should conduct the practice as a

A)corporation.
B)general partnership.
C)joint venture.
D)limited liability partnership.
E)limited partnership.

Answer 3

D

Question 4

John and George have been talking about going into business together.John wants the business as an investment and has the money necessary to set it up,but wants no responsibility and little liability.On the other hand,George wants to run the business and is prepared to accept the liability that goes with it.In this case,the agreement that John and George will enter into to do business together is

A)a shareholders agreement.
B)a joint venture agreement.
C)a trust agreement.
D)a limited partnership agreement.
E)a limited liability partnership agreement.

Question 5

A partnership is treated as a separate entity with respect to

A)the paying of income taxes.
B)its ability to exist independent of its owners.
C)passing it on to heirs.
D)bankruptcy.
E)having its own assets and liabilities.

Question 6

Chico and Amos decide to be partners in the storage and delivery business.Chico has some land with buildings to contribute,and Amos has a large van and a small truck to contribute.After two years (and sharing profits equally),they decide that the business is not worth all the trouble,so they liquidate.The land and buildings bring $45 000,and the two vehicles bring $7000.How should the proceeds be divided?

A)In absence of a clear agreement,the Partnership Act gives each back his original investment.
B)It all depends on their original intentions as to what was partnership property.
C)Chico should get the $45 000.
D)It depends on whether they want to remain friends.
E)Since they are equal partners,they should each get $26 000.

Question 7

Fred is a partner in a land development partnership.He has learned independently of an opportunity to pursue a land development project with Nelly.Nelly refuses to be involved in business with Fred if he associates his partnership in the project.Nelly will do business with Fred only if he is independent of his partners.Fred will have no liability to his partners if

A)he keeps the opportunity secret.
B)he is careful to inform any third parties with whom he and Nelly do business that he is not acting on behalf of the partnership.
C)he ensures that anything he does on the project is outside office hours.
D)no damages are suffered by the partnership.
E)none of the above

Question 8

A partnership agreement falls under the Statute of Frauds

A)if by its terms it extends beyond one year and performance has not begun.
B)because it involves the formation of a company.
C)if it is to be dealing with real property.
D)if it is to last longer than a year.
E)because memories will fade and a written record is essential.

Question 9

Usually the sharing of profits is an indication of a partnership.In which of the following situations will this be true?

A)to pay the spouse of a deceased partner an annuity
B)to pay an employee as part of his or her remuneration
C)to pay the seller of a business an amount for goodwill varying with the profits
D)to repay a debt owed
E)none of the above

Question 10

The greatest risk of liability to which a partner subjects her- or himself results from

A)failure to create a binding partnership agreement under the Partnership Act.
B)negligence or other torts of the firm's partners.
C)possible contractual obligations of the partnership.
D)personal liabilities incurred by the other partners.
E)illegal activities of the other partners.

Question 11

Which of the following is NOT true about partnerships?

A)Personal creditors of the individual partner have first call against partnership assets.
B)A partnership is sometimes treated as a separate entity.
C)A partnership may be sued in the firm's name,and,upon exhaustion of assets,the plaintiff may now go after the personal assets of any of the partners.
D)Dower rights do not apply to partnerships.
E)Generally,a person is liable only for the obligations of a partnership created while she or he is a member of the firm.

Question 12

A and B have decided to carry on a business in partnership in Ontario,and A has his lawyer prepare a detailed partnership agreement setting out their respective rights and obligations.However,at the last minute,B refuses to sign the agreement and A,who trusts B,decides that the agreement is unnecessary.In this case,the partnership will be governed by

A)the law of contract.
B)the terms of the partnership agreement.
C)the Partnership Act.
D)the Business Names Act.
E)the principles of equity.

Question 13

Two years ago the Citizens Bank lent the Carlin & Hickel Partnership $2 million.Now the firm is defaulting on their monthly payments.Which of the following partners will be liable on this loan?

A)a partner who died six months ago
B)a partner who retired from the firm last summer and obtained,through novation,a liability release from this loan
C)a person who is not actually a partner but is currently allowing himself to be represented as a partner so the firm can refinance this Citizens Bank loan
D)all six limited partners
E)a partner who has been with the firm for less than two years

Question 14

Use the fact situation in Q8 to answer the related question that follows. Assume that the partnership is governed by a partnership agreement,which provides that on the retirement or bankruptcy of a partner,the partnership and firm continues.In such a case,on Albert's death,

A)the partnership will continue,with Albert's estate replacing Albert as a partner.
B)the partnership will continue between John,George,and Alice.
C)the partnership will become a joint venture.
D)the partnership will be dissolved.
E)the partnership will continue,but the firm name must be changed.

Question 15

Which of the following is true about sole proprietorships?

A)Generally they are subject to different regulations than are other forms of business.
B)Just as corporations,they must abide by human rights legislation and meet health and safety regulations for the employees.
C)Business names of all sole proprietorships must be registered.
D)Sole proprietorships require government formalities to get established.
E)Sole proprietorships comprise the smallest number of businesses in Canada.

Question 16

For three years,John,Michael,and Mary have carried on a business that is charitable in nature.Each of them contributed capital to the business and has his or her duties set out in an agreement.The form of business that they have created is

A)a sole proprietorship.
B)a joint venture.
C)a general partnership.
D)a limited liability partnership.
E)none of the above

Question 17

Carter,a partner in a financial planning firm,solicited a client without reporting it to the firm.He used the letterhead,business cards,and facilities of the firm.He then defrauded the client out of $138 000 and left for Honduras.Will the firm be liable to this client?

A)Yes,it will,because the firm could then go after Carter and collect for its loss.
B)Yes,it will,since Carter was working without apparent authority.
C)Yes,it will,since all partners are responsible for "any wrongful act" of another partner.
D)No,it will not,since Carter was breaking his fiduciary duty to the other partners.
E)No,it will not,since this act to defraud is illegal and partners do not have to support illegal acts.

Question 18

A,a partner in a furniture business called A & B Furniture,causes an accident with the business's delivery truck and injures Alice,who is standing at a bus stop. Assume that in the law suit Alice will be entitled to $1 million in damages.Also assume that A has personal assets of $250 000.00 and B has personal assets of $450 000.00 and that the firm has assets of $1.5 million.In deciding who to sue,Alice will consider that

A)if Alice sues the firm alone its assets will cover her damages.
B)if Alice sues A and B only and succeeds,she cannot sue the firm.
C)if Alice sues A only and succeeds,she cannot sue B or the firm.
D)if Alice sues B only and succeeds,she cannot sue A or the firm.
E)all of the above

Question 19

Use this fact situation to answer the related questions that follow. A,B,and C have been carrying on a business in partnership for two years but are not getting along very well.The business manufactures plastic cups.A has just learned that B and C are going to throw him out of the partnership and,to get even with them,A,who has no assets,resigns and immediately enters into a contract with a third party on behalf of the business to purchase $100 000.00 worth of supplies.When the supplies arrive,B and C refuse to accept them.
If the third party decides to sue for damages for breach of contract,it can sue

A)B and C.
B)A,B,and C.
C)B alone.
D)C alone.
E)all of the above

Question 20

Use this fact situation to answer the related questions that follow. Albert,John,George and Alice are partners in the accounting firm AGJM,but have no partnership agreement.
In the event that Albert dies,

A)the partnership continues between John,George,and Alice.
B)the partnership is dissolved.
C)the partnership will continue,with Albert's estate replacing Albert as a partner.
D)the partnership becomes a joint venture.
E)the partnership continues,but the firm name must be changed.

Question 21

Lou,Pete,and Carl are all partners in a feed store business.Carl would like to retire but wants his son,Carl Jr. ,to take his place as partner.Is there any way Carl can have his son become a partner?

A)Yes,he can,but only by getting agreement from any two existing partners.
B)Yes,he can,since partnership positions can be transferred through assignment.
C)Yes,he can,with the consent of all existing partners.
D)Yes,he can,by bringing Carl Jr.in as manager and then working him into a partner position.
E)No,he can't,because it's only Carl's profits that can be assigned.

Question 22

A Limited Liability Partnership (LLP)protects a partner from some personal liability.Even though a partner in an LLP is not liable for debts,liabilities,or obligations arising from the negligent acts or omissions of other partners or employees,a partner is subject to all of the following EXCEPT

A)remaining liable for his own negligent acts or omissions.
B)remaining liable for the negligent acts or omissions for those who are under the partner's direct supervision and control.
C)standing to lose the full extent of his net worth.
D)standing to lose the value of his partnership share.
E)being an agent of the firm and his other partners for the purpose of the business of the partnership.

Question 23

Three men decided to form a partnership to look for buried treasure.Luke and Mark had expensive equipment,experience,and expertise,but the third partner,Cyrus,had a treasure map.Cyrus had his holidays start a few days earlier than the other two,so he went ahead "to set up camp." Lo and behold,before the others arrived,Cyrus found the treasure.So when Luke and Mark arrived,he immediately dissolved the partnership and claimed the entire treasure for himself.Do Luke and Mark have any legal claim to the treasure?

A)Yes,they have a fiduciary duty to take their share.
B)No,they don't,because Luke and Mark's assets were not used to find the treasure.
C)Yes,they do,because the treasure was found before the partnership was dissolved.
D)No,they don't,because the partnership was dissolved before the treasure was made known.
E)Yes,they do,because Cyrus has both possession and the upper hand.

Question 24

Which of the following is NOT a fiduciary duty owed by one partner to another?

A)Partners are bound to render true accounts and full information of all things affecting the partnership to any partner.When it comes to business of the partnership,partners do not keep information secret from one another.
B)Every partner must account to the firm for any benefit derived by him or her without the consent of the other partners from any transaction concerning the partnership or any use by him or her of the partnership property name or business connection.There shall be no secret benefits.
C)Every partner must disclose to every other partner any interest she or he has in any other partnership or corporation.
D)A partner must account for and pay over to the firm any profits made by him or her in carrying on any business of the same nature as that of the partnership and competing with the firm.

Question 25

In Ontario,in the absence of a partnership agreement,the provisions of the Partnership Act apply to a general partnership.

Question 26

For the last 14 months,Greer has been a junior partner in a Vancouver law firm.Until now he was receiving a monthly salary of $5000.Senior partners have just decided to stop all salaries because of a pending lawsuit against the firm.It was determined the firm would not make profits for at least the next eight months.Is the firm obliged to continue Greer's salary?

A)No,it is not,since partners can only be paid out of profits.
B)Yes,it is,since salaries are the first call on the firm's profits.
C)No,it is not,since the firm cannot claim the doctrine of frustration.
D)Yes,it is,since salaries are an expense that comes off before profits are figured.
E)Yes,it is,since Greer has a wife and kids who are dependant on the salary for basic living expenses.

Question 27

A contractual joint venture differs from a partnership in that

A)there is a fiduciary relationship between the participants.
B)it pools assets and expertise for a business endeavour.
C)it is a relationship for a specific undertaking with a limited duration.
D)profits are retained jointly for use in another project.
E)the liability will be construed to be joint and several.

Question 28

A partnership has no independent existence in law.

Question 29

In a limited partnership,although the limited partner actively engages in the management of the partnership business,only the general partner has unlimited liability.

Question 30

A partnership incurs no liability for a breach of trust committed by one of its partners.

Question 31

A Limited Liability Partnership (LLP)is different from a limited partnership.Which of the following is NOT true?

A)In a limited partnership there must be at least one general partner who has unlimited liability.
B)Limited partnerships are not restricted to the professions.
C)In a limited partnership,the partner's liability is limited to the total amount of capital contributions of all partners.
D)Unlike partners in an LLP,limited partners lose their limited liability if they participate in management.

Question 32

Helen and George formed an equal partnership for the raising of flowers to sell at the county fair.After three seasons of mediocre results,George lost interest and only came around to "see how things were going." However,the fourth summer went very well for Helen and she made a large profit.Can George now claim half the profits?

A)No,he can't,since the partnership was dissolved by estoppel.
B)Yes,he can,since neither partner terminated the partnership.
C)Yes,he can,since the ratio for dividing of the profits cannot be changed.
D)No,he can't,because with Helen's application,the court will dissolve this partnership.
E)No,he can't,since George did very little to manage or help in the business.

Question 33

A partnership is a business relationship between two or more persons,but not all business relationships between two or more persons are partnerships.

Question 34

Chartered accountants can carry on a limited liability partnership without a limited liability partnership agreement.

Question 35

The court may upon an application by one or more partners order the partnership dissolved under which circumstance?

A)a partner is found mentally incompetent
B)a partner willfully or persistently commits a breach of the partnership agreement
C)a partner becomes permanently incapable of performing his part of the partnership agreement
D)a partner is guilty of conduct that adversely affects the carrying on of the business
E)all of the above

Question 36

Johnson,Michael & Associates is a partnership of accountants.One evening,Bosco,the truck driver for the firm,during the course of performing his duties,gets into an accident with James.James is injured and later commences a personal injury action against the partnership.James obtains judgment of $250 000 against the partnership.The partnership is not insured and has only $150 000 in its account.James may recover the balance of $100 000 from the personal assets of any of the individual partners.

Question 37

An individual who decides to carry on business in his or her name need not register the business.

Question 38

James and John go into business together as partners.They each decide to make contributions to the business of the partnership.James has two vans worth $15 000,which he gives to the partnership.John owns an old farmhouse worth $60 000 that they decide can be used as a warehouse,and John gives it to the partnership.Five years later,there is a falling out and they decide to end the partnership.By this time the warehouse is worth $80 000 and the vans are worth $12 000.John will be entitled to $80 000 and James will be entitled to the depreciated value of the vans,namely $12 000.

Question 39

If there is no explicit partnership agreement,each partner will share in the profits of the partnership according to that partner's proportionate capital contribution.

Question 40

The type of unincorporated business that is usually owned by one person is called a partnership.

Question 41

Is a well-drafted,carefully thought-out partnership agreement a guarantee of a successful partnership? If not,what is?

Question 42

You are interested in creating a business and have a friend who is also interested in the same type of business,but you are not a professional and you feel that even the best of friends can have a falling out when they go into business together.Is there really any practical difference between considering a sole proprietorship and a partnership for your business?

Question 43

Explain how a partnership can be formed by implication.

Question 44

Bill and Joe agreed to form a partnership to carry on their goal of distributing food to the needy as a charitable endeavour.Is this a true partnership?

Question 45

Why should you register the partnership with the province?

Question 46

In a contractual joint venture,how do the participants protect themselves from the liabilities of their partners?

Question 47

Compared to a sole proprietorship,what are some disadvantages in carrying on business as a partnership?

Question 48

Partners have fiduciary duties one to another,and if they are professionals they have fiduciary duties to their clients.How would these duties differ?

Question 49

What are the advantages of carrying on a business venture as a partnership rather than as a sole proprietorship?

Question 50

Why is it practical to think of a partnership as having its own separate personality rather than just the collective rights and duties of all the partners?

Question 51

What protection does a limited partnership offer to the limited partner,and how can the benefit be destroyed by the limited partner?

Question 52

Partners are generally liable for the torts committed by another partner in the ordinary course of the business.Furthermore,each partner is jointly liable for the debts and obligations of the firm.A Limited Liability Partnership (LLP)limits a partner's liability as a result of the negligent acts or omissions of another partner.

Question 53

What steps should a retiring partner take to ensure that his or her liability as a partner is at an end?

Question 54

Explain why partners should always have a partnership agreement.

Question 55

What are two important factors in determining the type of partnership that parties may wish to enter into?

Question 56

Three women form a partnership.They contribute the same amount of capital and they have agreed to share equally on the profits.If a loss occurs,need they share equally on the loss? If they each put in roughly the same amount of time,can their salaries be different? Explain your answer in both cases.

Question 57

Mike,James,and Mary,advertising consultants,enter into a partnership and name it Sensational Adverts.About a year a year after the partnership is established,Mike and Mary have an argument and Mike tells the other partners that he will soon be leaving the partnership.A week later,Sensational Adverts is invited to submit a bid to produce an advert for a local beer company.Mike,who is the member of the partnership in charge of beer adverts,sees this as an opportunity to start his own business.Mike resigns from Sensational Adverts,starts his own company,and then submits a bid.Mike's bid is accepted.There is nothing legally wrong with Mike's conduct.